EUR/JPY drifts higher above 165.50 after BoJ surprises rate hike

• EUR/JPY gains ground around 165.75 in Wednesday’s Asian session, up 0.33% on the day.
• The BoJ surprised the markets by raising interest rates by 15 bps and trimming bond buying.
• German GDP numbers and inflation data add to the ECB's challenges with cutting interest rates.

The EUR/JPY cross trades on a stronger note near 165.75 during the Asian session on Wednesday. The Japanese Yen (JPY) edges lower after the Bank of Japan (BoJ) decided to raise the interest rate at its July meeting on Wednesday.

Following the two-day monetary policy review meeting on Wednesday, the BoJ surprised the markets by raising its short-term rate target by 15 basis points (bps) from the range of 0%-0.1% to 0.15%-0.25%. Additionally, the Japanese central bank decided to taper Japanese government bonds (JGB) buying to 3 trillion per month as of the first quarter of 2026. The Japanese Yen (JPY) loses ground despite the BoJ hiking its short-term rate. 

Disappointing economic growth and a surprising acceleration in German inflation add to the European Central Bank’s uncertainty about further interest-rate cuts in September. The German Harmonized Index of Consumer Prices (HICP) rose 2.6% YoY in July, compared to 2.5% in June, above the consensus of 2.4%. This figure triggered the prospect that Germany’s prolonged stagflation will continue in the coming quarters. 

Meanwhile, the German economy shrank by 0.1% QoQ after growing 0.2% in Q1, the first estimate data published by Destatis showed on Tuesday. This figure came in weaker than the expected 0.1% increase. The Eurozone economy expanded by 0.3% in the three months to the end of June, above the market consensus of a 0.2% increase on a quarterly basis. Traders will take more cues from the preliminary Eurozone CPI data and Germany’s Retail Sales, which are due later on Wednesday.